H.R.1060: The Distorting Subsidies Limitation Act

March 10, 1999. This legislation, introduced in the U. S. House of Representatives by Congressman David Minge, is based on a plan developed by officials of the Federal Reserve Bank of Minnesota. The legislation is intended to reduce the pressure that states and cities currently face to participate in the “Economic War Among the States” by having the federal government tax away the benefits that corporations receive in the form of state and local government subsidies.

SHORT TITLE AS INTRODUCED: Distorting Subsidies Limitation Act of 1999

OFFICIAL TITLE AS INTRODUCED: To amend the Internal Revenue Code of 1986 to provide that economic subsidies provided by a State or local government for a particular business to locate or remain within the government’s jurisdiction shall be taxable to such business, and for other purposes.

SUMMARY: Distorting Subsidies Limitation Act of 1999 – Amends the Internal Revenue Code to impose an excise tax on any person engaged in a trade or business who derives any benefit from any targeted subsidy provided by a State or local government. Defines such a subsidy as one which is designed to encourage a business to locate or remain in a particular jurisdiction. Denies a tax exemption for any interest earned on bonds which provide such subsidies. Prohibits the use of Federal funds to provide such a subsidy.

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106th CONGRESS

1st Session

H. R. 1060

To amend the Internal Revenue Code of 1986 to provide that economic subsidies provided by a State or local government for a particular business to locate or remain within the government’s jurisdiction shall be taxable to such business, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

March 10, 1999

Mr. MINGE introduced the following bill; which was referred to the Committee on Ways and Means A BILL

To amend the Internal Revenue Code of 1986 to provide that economic subsidies provided by a State or local government for a particular business to locate or remain within the government’s jurisdiction shall be taxable to such business, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Distorting Subsidies Limitation Act of 1999′.

SEC. 2. FINDINGS.

Congress finds the following:

(1) Competition among State and local governments for new and existing businesses has become the rule rather than the exception.

(2) State and local governments are being forced to compete against each other for businesses with scarce tax dollars that would otherwise be used for essential public goods and services.

(3) When State and local government competition takes the form of preferential treatment for specific businesses, it undermines our national economic union by distorting the allocation of resources.

(4) There is a role for competition between States and localities when it takes the form of general tax policies, regulation structures, and public services because such competition leads States and localities to provide better service, cost effective regulation, sound tax policies, and more efficient allocation of public and private goods.

(5) Federal program grants have been used by State and local governments to subsidize business location decisions to attract businesses from other States and localities.

(6) Proceeds from tax-exempt municipal bonds have been used by one State or locality to attract business from other States and localities.

(7) No single State or local government can unilaterally withdraw from this competition. Only Congress with its enumerated powers can end the economic distortions and the public costs caused by economic distortions.

SEC. 3. TAXATION OF VALUE OF TARGETED SUBSIDIES PROVIDED BY STATE AND LOCAL GOVERNMENTS.

(a) IN GENERAL- Subtitle D of the Internal Revenue Code of 1986 (relating to miscellaneous excise taxes) is amended by inserting after chapter 44 the following new chapter:

`CHAPTER 45–EXCISE TAX ON TARGETED STATE OR LOCAL GOVERNMENT DEVELOPMENT SUBSIDIES

`Sec. 4986. Targeted State or local government development subsidies.

`SEC. 4986. TARGETED STATE OR LOCAL GOVERNMENT DEVELOPMENT SUBSIDIES.

`(a) GENERAL RULE- There is hereby imposed for each calendar year an excise tax on any person engaged in a trade or business who derives any benefit during such year from any targeted subsidy provided by any State or local governmental unit.

`(b) AMOUNT OF TAX- The tax imposed by subsection (a) shall consist of a tax computed as provided in section 11(b) as though the aggregate value (determined under regulations prescribed by the Secretary) of benefits referred to in subsection (a) accruing during the calendar year were the taxable income referred to in section 11.

`(c) DEFINITIONS- For purposes of this section–

`(1) TARGETED SUBSIDY-

`(A) IN GENERAL- The term `targeted subsidy’ means, with respect to any person, any subsidy–

`(i) which is designed to encourage any trade or business operation of such person to locate in a particular governmental jurisdiction or to remain in a particular governmental jurisdiction, or

`(ii) which is reasonably expected to have the effect of a subsidy described in clause (i).

`(B) CERTAIN MORE BROADLY AVAILABLE SUBSIDIES TREATED AS TARGETED SUBSIDIES-

`(i) IN GENERAL- A subsidy shall not fail to be a targeted subsidy by reason of applying to (or being available to) more than 1 trade or business operation if such subsidy is determined (under regulations prescribed by the Secretary) not to be part of the general long-term taxing or spending policies of the governmental unit.

`(ii) GENERAL LONG-TERM POLICIES- A subsidy shall be treated as part of the general long-term taxing or spending policies of the governmental unit only if the subsidy is available to all trade or business operations within the jurisdiction of such governmental unit without regard to the period during which any operation has been conducted within such jurisdiction.

`(2) SUBSIDY- The term `subsidy’ includes–

`(A) any grant,

`(B) any contribution of property or services,

`(C) any right to use property or services, or any loan, at rates below those commercially available to the taxpayer,

`(D) any reduction or deferral of any tax or any fee (including any payment by any State or local governmental unit of any tax or fee),

`(E) any guarantee of any payment under any loan, lease, or other obligation,

`(F) any use of governmental facilities (including roads, facilities for the furnishing of water, sewage facilities, and solid waste disposal facilities) to the extent that the amount paid by (or assessed against the property of) the trade or business for such use is less than the amount it would pay were the charge for its use (or the assessment) determined under the same formula or other basis as is used by the State or local government with respect to other comparable facilities used by other trades or businesses, and

`(G) any other benefit specified in regulations prescribed by the Secretary.

`(d) EXCEPTION FOR SUBSIDIES FOR EMPLOYEE TRAINING AND EDUCATION- No tax shall be imposed by this section on the value of any subsidy provided for employee training or for other education programs.

`(e) SPECIAL RULES-

`(1) EXCEPTION FOR SUBSIDIES PROVIDED TO GOVERNMENTAL ENTITIES- No tax shall be imposed by this section on the value of any subsidy provided to–

`(A) an agency or instrumentality of any government or any political subdivision thereof, or

`(B) any entity which is owned and operated by a government or any political subdivision thereof or by any agency or instrumentality of one or more governments or political subdivisions.

`(2) AVOIDANCE OF DOUBLE TAX- No amount shall be includible in gross income for purposes of subtitle A by reason of any targeted subsidy on which tax is imposed under this section.

`(3) ADMINISTRATIVE PROVISIONS- For purposes of subtitle F, any tax imposed by this section shall be treated as a tax imposed by subtitle A.’

(b) DENIAL OF INCOME TAX DEDUCTION FOR TAX- Paragraph (6) of section 275(a) of such Code is amended by inserting `45,’ after `44,’.

(c) CLERICAL AMENDMENT- The table of chapters for subtitle D of such Code is amended by inserting after the item relating to chapter 44 the following new item:

`Chapter 45. Excise tax on targeted State or local government development subsidies.’

(d) EFFECTIVE DATE- The amendments made by this section shall apply to any subsidy which is provided pursuant to an agreement or arrangement entered into more than 30 days after the date of the enactment of this Act.

SEC. 4. DENIAL OF EXEMPTION FROM TAX FOR INTEREST ON BONDS PROVIDING TARGETED STATE OR LOCAL GOVERNMENT DEVELOPMENT SUBSIDIES.

(a) IN GENERAL- Subsection (b) of section 103 of the Internal Revenue Code of 1986 (relating to interest on State and local bonds) is amended by adding at the end the following new paragraph:

`(4) BONDS PROVIDING TARGETED DEVELOPMENT SUBSIDIES- Any bond if any portion of the proceeds of such bond is to be used to provide any targeted subsidy (as defined in section 4986(c)).’

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to obligations issued after the date of the enactment of this Act.

SEC. 5. PROHIBITION OF USE OF FEDERAL FUNDS FOR TARGETED SUBSIDIES.

(a) IN GENERAL- Notwithstanding any other provision of law, none of the Federal funds provided to any State or local government may be used to provide any targeted subsidy (as defined in section 4986(c) of the Internal Revenue Code of 1986).

(b) RECOVERY OF FUNDS USED TO PROVIDE TARGETED SUBSIDIES- If the Secretary of the Treasury or the Secretary’s delegate finds after reasonable notice and opportunity for hearing that any State or local government used Federal funds in violation of subsection (a), the Secretary or the Secretary’s delegate shall take such actions as are necessary (including referring the matter to the Attorney General of the United States with a recommendation that an appropriate civil action be instituted) to recover the amount so used from the State or local government or the trade or business, whichever the Secretary determines to be appropriate.

(c) EFFECTIVE DATE- This section shall apply to funds provided after the date of the enactment of this Act.